Viewing cable 06VILNIUS891
Title: RUMORS CONTINUE TO SWIRL ABOUT THE FATE OF

IdentifierCreatedReleasedClassificationOrigin
06VILNIUS8912006-09-26 14:55:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy Vilnius
VZCZCXRO0771
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHVL #0891/01 2691455
ZNY CCCCC ZZH
O 261455Z SEP 06
FM AMEMBASSY VILNIUS
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0617
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHCV/AMEMBASSY CARACAS PRIORITY 0022
RHEHNSC/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000891 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/NB, EUR/NCE, EB/ESC 
STATE PLEASE PASS TO FEDERAL TRADE COMMISSION 
DOE FOR HARBERT 
DOC FOR 4231/IEP/EUR/BOHIGIAN 
NSC FOR GRAHAM, MCKIBBEN AND COEN 
TREASURY FOR LOWERY, LEE AND COX 
 
E.O. 12958: DECL: 08/24/2021 
TAGS: ENRG EPET PREL KZ VE LH
SUBJECT: RUMORS CONTINUE TO SWIRL ABOUT THE FATE OF 
LITHUANIA'S OIL REFINERY 
 
REF: VILNIUS 801 AND PREVIOUS 
 
Classified By: Pol/Econ Section Chief Rebecca Dunham for reasons 1.4 (b 
) and (d). 
 
 ¶1. (C) SUMMARY:  Rumors about the fate of Lithuania's 
Mazeikiu Nafta (MN) oil refinery continue to circulate.  Most 
of them appear false.  A front-page article in Lithuania's 
largest newspaper proclaiming that MN was "sliding again into 
Moscow's hands" was a near-total fabrication, according to 
one of our most reliable sources on MN issues.  MN's Board of 
Directors unexpectedly voted four to three on September 22 to 
reject a proposed long-term supply contract with Venezuela, 
complicating management's efforts to diversify supply away 
from Russia.  Local press also reports that PKN is concluding 
its pre-notification consultations with EU competition 
authorities and will officially submit its application to 
purchase MN within two weeks.  END SUMMARY. 
 
----------------------------- 
A BOUGHT-AND-PAID-FOR ARTICLE 
----------------------------- 
 
¶2. (C) An article alleging that the Polish oil company PKN 
Orlen -- which is currently finalizing arrangements to buy MN 
from Yukos and the GOL -- was preparing to transfer a portion 
of MN's shares to Russia's LUKoil is "total nonsense," 
according to Saulius Specius, adviser to the prime minister 
on energy issues and one of our most reliable sources on MN. 
The article, which appeared on the front page of Lithuania's 
largest-circulation daily (Lietuvos Rytas) on September 23, 
also alleged that a "prominent Lithuanian woman" would 
receive USD 100 million in an offshore account if the 
transfer of shares to LUKoil went well.  Our local staff 
interpreted this woman to be former PM Brazauskas's wife, 
Kristina, the subject of speculation about her links with 
LUKoil.  MN Chairman Nerijus Eidukevicius, however, told us 
that he thinks the reference was to a Social Democrat party 
member, whom he did not wish to name. 
 
¶3. (U) PM Kirkilas also flatly denied that PKN was preparing 
to sell MN shares to LUKoil in a public statement on 
September 26.  He announced that he will meet PKN president 
Igor Chalupec in Vilnius to discuss the article's 
allegations.  (Chalupec is already in town.) 
 
¶4. (C) Specius told us on September 25 that the journalist 
who wrote the article (Ramune Sotvariene) called him several 
times before publishing the story.  He said that he explained 
repeatedly that PKN's contract with the GOL prohibits any 
transfer of shares in the near future (he thought five years, 
but wasn't sure) and prohibits indefinitely the possibility 
of PKN selling or transferring part of the shares.  After the 
transfer-prohibition period lapses, Specius explained, PKN 
can sell only the entirety of its stake in MN (approximately 
85 percent of MN's shares), not portions of it.  Even 
further, he emphasized, any sale or transfer would require 
the consent of the GOL, as the contract recognizes MN as a 
"strategic asset" whose sale requires a national security 
review by the GOL.  Specius said that the contract -- 
negotiated under English law and enforceable in English 
courts -- very clearly prohibited the type of transfer 
described in the article. 
 
¶5. (C) Queried on the source of the article, Specius opined 
that the Kazakh state-owned energy firm KazMunayGaz (KMG) 
likely paid to have it written.  He said that the KMG team 
that attempted to negotiate KMG's purchase of MN earlier this 
year failed to present KMG's final offer for MN on time, 
effectively leaving PKN as the sole remaining bidder.  This 
team (which includes one of President Nazarbayev's in-laws), 
he said, is now trying to save face by portraying PKN as an 
untrustworthy partner and scuttling the MN deal. 
 
¶6. (C) Nerijus Eidukevicius, chairman of MN's Board of 
Directors, told us much the same thing on September 26.  He 
said that PKN could not transfer any shares to LUKoil or 
anybody else without the agreement of the GOL.  He said that 
a KMG rep was in Vilnius to negotiate a supply agreement with 
 
VILNIUS 00000891  002 OF 002 
 
 
MN the night before the article appeared and suggested that 
the article may have been intended to support KMG's 
last-ditch efforts to win this contract. 
 
------------------------------ 
POSSIBLE SUPPLY DEAL SHOT DOWN 
------------------------------ 
 
¶7. (C) MN General Director Nelson English told the Ambassador 
on September 23 that MN's Board of Directors rejected a 
proposed long-term supply contract with Venezuela.  English 
personally negotiated the agreement with the Venezuelans, 
which would have mitigated MN's supply problems stemming from 
the July 29 shutdown of the crude pipeline from Russia. 
While the three GOL directors supported the deal, the four 
Yukos-appointed directors voted against it.  English 
suggested that the Yukos-appointed directors were "doing the 
Russians' bidding." 
 
¶8. (C) Specius told us that he was at first unsure of the 
Yukos directors' motives, but his concern was mitigated when 
he learned more about the reasons for their decision.  He 
said that one or two of them had previously worked on oil 
projects in Cuba and had first-hand experience dealing with 
the Venezuelans, who proved themselves undependable by 
providing crude of wildly varying quality.  Specius added 
that the Yukos directors were not opposed to obtaining 
Venezuelan oil on the spot market, but felt that a long-term 
contract with an unreliable supplier would not be in MN's 
best interest. 
 
¶9. (C) Eidukevicius, who chaired the meeting, told us that he 
detected personal animosity between the Yukos directors and 
English.  He said that the Yukos directors believed that 
English had conducted the negotiations with the Venezuelans 
without consulting board members, and they were not happy 
with being kept in the dark.  At one point, Eidukevicius 
said, English and one of the Yukos directors were literally 
yelling at each other. 
 
¶10. (C) Eidukevicius said that, enmity aside, the main reason 
for the board's rejection of the deal was that a long-term 
(five-year) contract with the Venezuelans would dissuade the 
Russians from ever repairing the pipeline that used to supply 
MN.  He added, however, that two of the board members were 
participating by telephone from Russia (and a third from 
Riga), which may have prevented them from speaking freely. 
He said that he did not have the feeling that the Yukos 
directors were unduly influenced by LUKoil or other Russian 
interests, but could not completely discount the possibility. 
 
------------------- 
STATUS OF EU REVIEW 
------------------- 
 
¶11. (C) Local press and our sources say that PKN is only now 
finishing up its pre-notification consultations with the EU's 
DG-Comp and will apply formally for approval of its purchase 
of MN within two weeks.  Because of the extensive advance 
consultations PKN has done, our  contacts claim that the deal 
will sail through quickly (i.e., within the span of about one 
month). 
 
------- 
COMMENT 
------- 
 
¶12. (C) There are still many players outside of this deal who 
want it to fail.  We therefore expect these kinds of rumors 
to continue at least until PKN finalizes its purchase of the 
refinery.  What is disturbing about this episode is that 
Lithuania's "paper of record" seems to have served as a 
vehicle for deal-breaking disinformation. 
CLOUD